| GREAT PLAINS ENERGY INC predict all factors |
| Item 1A Risk Factors included in this report should be carefully read for further understanding of potential risks to the companies |
| Other sections of this report and other periodic reports filed by the companies with the SEC should also be read for more information regarding risk factors |
| 3 GLOSSARY OF TERMS The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report |
| Abbreviation or Acronym Definition ARO Asset Retirement Obligation BART Best available retrofit technology CAIR Clean Air Interstate Rule CAMR Clean Air Mercury Rule Clean Air Act Clean Air Act Amendments of 1990 CO[2] Carbon Dioxide Company Great Plains Energy Incorporated and its subsidiaries Consolidated KCP&L KCP&L and its wholly owned subsidiaries Digital Teleport Digital Teleport, Inc |
| and its subsidiaries, Digital Teleport, Inc |
| and Digital Teleport of Virginia, Inc |
| EBITDA Earnings before interest, income taxes, depreciation and amortization EEI Edison Electric Institute EIRR Environmental Improvement Revenue Refunding EPA Environmental Protection Agency EPS Earnings per common share FASB Financial Accounting Standards Board FELINE PRIDES^SM Flexible Equity Linked Preferred Increased Dividend Equity Securities, a service mark of Merrill Lynch & Co, Inc |
| FERC The Federal Energy Regulatory Commission FIN Financial Accounting Standards Board Interpretation GAAP Generally Accepted Accounting Principles GPP Great Plains Power Incorporated Great Plains Energy Great Plains Energy Incorporated and its subsidiaries Holdings DTI Holdings, Inc |
| KLT Gas portfolio KLT Gas natural gas properties KLT Inc |
| KW Kilowatt kWh Kilowatt hour MAC Material Adverse Change MD&A Management’s Discussion and Analysis of Financial Condition and Results of Operations 4 Abbreviation or Acronym Definition MISO Midwest Independent Transmission System Operator, Inc |
| Strategic Energy Strategic Energy, LLC, a subsidiary of KLT Energy Services T - Lock Treasury Lock Union Pacific Union Pacific Railroad Company WCNOC Wolf Creek Nuclear Operating Corporation Wolf Creek Wolf Creek Generating Station Worry Free Worry Free Service, Inc, a wholly owned subsidiary of HSS 5 PART I ITEM 1 |
| BUSINESS General Great Plains Energy Incorporated and Kansas City Power & Light Company are separate registrants filing this combined annual report |
| The terms “Great Plains Energy,” “Company,” “KCP&L” and “consolidated KCP&L” are used throughout this report |
| “Great Plains Energy” and the “Company” refer to Great Plains Energy Incorporated and its consolidated subsidiaries, unless otherwise indicated |
| “KCP&L” refers to Kansas City Power & Light Company, and “consolidated KCP&L” refers to KCP&L and its consolidated subsidiaries |
| Information in other Items of this report as to which reference is made in this Item 1 |
| is hereby incorporated by reference in this Item 1 |
| The use of terms such as see or refer to shall be deemed to incorporate into this Item 1 |
| the information to which such reference is made |
| GREAT PLAINS ENERGY Great Plains Energy, a Missouri corporation incorporated in 2001 and headquartered in Kansas City, Missouri, is a public utility holding company and does not own or operate any significant assets other than the stock of its subsidiaries |
| Great Plains Energy has four direct subsidiaries with operations or active subsidiaries: · KCP&L is described below |
| is an intermediate holding company that primarily holds, directly or indirectly, interests in Strategic Energy, LLC (Strategic Energy), which provides competitive retail electricity supply services in several electricity markets offering retail choice, and affordable housing limited partnerships |
| also wholly owns KLT Gas Inc |
| See Note 8 to the consolidated financial statements for additional information regarding KLT Gas discontinued operations |
| · Innovative Energy Consultants Inc |
| (IEC) is an intermediate holding company that holds an indirect interest in Strategic Energy |
| IEC does not own or operate any assets other than its indirect interest in Strategic Energy |
| When combined with KLT Inc |
| ’s indirect interest in Strategic Energy, the Company owns just under 100prca of the indirect interest in Strategic Energy |
| · Great Plains Energy Services Incorporated (Services) provides services at cost to Great Plains Energy and its subsidiaries, including consolidated KCP&L Great Plains Energy’s wholly owned subsidiary, Great Plains Power Incorporated (GPP), focused on the development of wholesale generation |
| GPP sold all of its capital assets related to the siting and permitting process for construction of Iatan Nodtta 2, a coal-fired generating plant, to KCP&L, at cost, during 2005 |
| Executing On Strategic Intent For a discussion of the Company’s strategic intent and KCP&L’s comprehensive energy plan, please refer to the Executing On Strategic Intent section in Item 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 5 to the consolidated financial statements for additional discussion of KCP&L’s comprehensive energy plan |
| 6 CONSOLIDATED KCP&L KCP&L, a Missouri corporation incorporated in 1922, is an integrated, regulated electric utility, which provides electricity to customers primarily in the states of Missouri and Kansas |
| (HSS), sold its wholly owned subsidiary Worry Free Service, Inc |
| (Worry Free) in February 2005 and completed the disposition of its interest in RS Andrews Enterprises, Inc |
| (RSAE) in June 2003 |
| After these sales, HSS has no active operations |
| Business Segments of Great Plains Energy and KCP&L Consolidated KCP&L’s sole reportable business segment is KCP&L Great Plains Energy, through its direct and indirect subsidiaries, has two reportable business segments: KCP&L and Strategic Energy |
| For information regarding the revenues, income and assets attributable to the Companyapstas reportable business segments, see Note 17 to the consolidated financial statements |
| Comparative financial information and discussion regarding the Company’s and KCP&L’s reportable business segments can be found in Item 7 |
| MD&A Regulation - General Regulatory matters affecting KCP&L and Strategic Energy are described below in the discussion on each of these reportable business segments |
| Capital Program and Financing For information on the Companyapstas and KCP&L’s capital program and financial needs, see Item 7 |
| MD&A, Capital Requirements and Liquidity section and Notes 18 and 19 to the consolidated financial statements |
| KCP&L KCP&L, headquartered in Kansas City, Missouri, engages in the generation, transmission, distribution and sale of electricity |
| Customers include approximately 440cmam000 residences, over 55cmam000 commercial firms, and over 2cmam200 industrials, municipalities and other electric utilities |
| KCP&L’s retail revenues averaged approximately 82prca of its total operating revenues over the last three years |
| Wholesale firm power, bulk power sales and miscellaneous electric revenues accounted for the remainder of utility revenues |
| KCP&L is significantly impacted by seasonality with approximately one-third of its retail revenues recorded in the third quarter |
| KCP&L’s total electric revenues averaged approximately 45prca of Great Plains Energy’s revenues over the last three years |
| KCP&L’s income from continuing operations accounted for approximately 88prca, 86prca and 67prca of Great Plains Energy’s income from continuing operations in 2005, 2004 and 2003, respectively |
| Regulation KCP&L is regulated by the Public Service Commission of the State of Missouri (MPSC) and The State Corporation Commission of the State of Kansas (KCC) with respect to retail rates, certain accounting matters, standards of service and, in certain cases, the issuance of securities, certification of facilities and service territories |
| KCP&L is classified as a public utility under the Federal Power Act and accordingly, is subject to regulation by the Federal Energy Regulatory Commission (FERC) |
| By virtue of its 47prca ownership interest in Wolf Creek Generating Station (Wolf Creek), KCP&L is subject to regulation by the Nuclear Regulatory Commission (NRC), with respect to licensing, operations and safety-related requirements |
| Missouri jurisdictional retail revenues averaged 57prca of KCP&L’s total retail revenue over the last three years |
| Kansas jurisdictional retail revenues averaged 43prca of KCP&L’s total retail revenue over the last three years |
| MD&A, Critical Accounting Policies section and Note 5 to the consolidated financial statements for additional information concerning regulatory matters |
| 7 Missouri and Kansas Rate Case Filings In February 2006, KCP&L filed rate cases with the MPSC and the KCC For information on these rate cases, see Note 5 to the consolidated financial statements for additional discussion of KCP&L’s comprehensive energy plan |
| Southwest Power Pool Regional Transmission Organization Under FERC Order 2000, KCP&L, as an investor-owned utility, is strongly encouraged to join a FERC approved RTO See Note 5 to the consolidated financial statements for further information |
| Competition Missouri and Kansas continue on the fully integrated utility model and no legislation authorizing retail choice has been introduced in Missouri or Kansas for several years |
| As a result, KCP&L does not compete with others to supply and deliver electricity in its franchised service territory, although other sources of energy can provide alternatives to KCP&L’s customers |
| If Missouri or Kansas were to pass and implement legislation authorizing or mandating retail choice, KCP&L may no longer be able to apply regulated utility accounting principles to deregulated portions of its operations and may be required to write off certain regulatory assets and liabilities |
| KCP&L does compete in the wholesale market to sell power in circumstances when power generated is not required for customers in its service territory |
| KCP&L competes in this regard with other owners of generating stations, principally utilities in its region, on the basis of availability and price |
| In recent years these wholesale sales have been an important source of revenues to KCP&L Power Supply KCP&L is a member of the Southwest Power Pool, Inc |
| (SPP) reliability region |
| As one of the ten regional members of the North American Electric Reliability Council, SPP is responsible for maintaining reliability in its area through coordination of planning and operations |
| As a member of the SPP, KCP&L is required to maintain a capacity margin of at least 12prca of its projected peak summer demand |
| This net positive supply of capacity and energy is maintained through its generation assets and capacity, power purchase agreements and peak demand reduction programs |
| The capacity margin is designed to ensure the reliability of electric energy in the SPP region in the event of operational failure of power generating units utilized by the members of the SPP KCP&L’s maximum system net hourly summer peak load of 3cmam610 MW occurred on August 21, 2003 |
| The maximum winter peak load of 2cmam563 MW occurred on December 7, 2005 |
| During 2005, the summer peak load was 3cmam512 MW The projected peak summer demand for 2006 is 3cmam595 MW KCP&L expects to meet its projected capacity requirements for the years 2006 through 2009 with its generation assets and through short-term capacity purchases, additional demand-side management and efficiency programs and the addition of wind generation |
| As part of its comprehensive energy plan, KCP&L expects to have Iatan Nodtta 2 in service in 2010 |
| 8 Fuel The principal sources of fuel for KCP&L’s electric generation are coal and nuclear fuel |
| KCP&L expects, with normal weather, to satisfy approximately 98prca of its 2006 fuel requirements from these sources with the remainder provided by natural gas and oil |
| The actual 2005 and estimated 2006 fuel mix and delivered cost in cents per net kWh generated are in the following table |
| Fuel cost in cents per Fuel Mix ^(a) net kWh generated Estimated Actual Estimated Actual Fuel 2006 2005 2006 2005 Coal 77 % 77 % 1dtta24 1dtta01 Nuclear 21 21 0dtta44 0dtta44 Natural gas and oil 2 2 11dtta15 8dtta29 Total Generation 100 % 100 % 1dtta22 1dtta06 ^(a) Fuel mix based on percent of total MWhs generated |
| Less than 1prca of KCP&L’s rates contain an automatic fuel adjustment clause |
| Consequently, to the extent the price of coal, coal transportation, nuclear fuel, nuclear fuel processing, natural gas or purchased power increase significantly after the expiration of the contracts described in this section, or if KCP&L’s lower fuel cost units do not meet anticipated availability levels, KCP&L’s net income may be adversely affected until the increased cost could be reflected in rates |
| Coal During 2006, KCP&L’s generating units, including jointly owned units, are projected to burn approximately 13dtta5 million tons of coal |
| These contracts will satisfy all projected coal requirements for 2006 and 2007 and 84prca, 35prca and 22prca respectively, for 2008 through 2010 |
| The remainder of KCP&L’s coal requirements will be fulfilled through additional contracts or spot market purchases |
| KCP&L has entered into its coal contracts over time at higher average prices affecting coal costs for 2006 and beyond |
| KCP&L has also entered into rail transportation contracts with various railroads for moving coal from the PRB to its generating units |
| These contracts will satisfy approximately all of the projected requirements for 2006 and 2007 and 98prca, 78prca and 77prca, respectively, for 2008 through 2010; however, KCP&L has been experiencing coal delivery issues |
| Coal transportation costs are expected to increase in 2006 and beyond |
| See Note 15 to the consolidated financial statements regarding a rate complaint case against Union Pacific Railroad Company |
| MD&A, KCP&L Business Overview for additional information |
| Nuclear Fuel KCP&L owns 47prca of Wolf Creek Nuclear Operating Corporation (WCNOC), the operating company for Wolf Creek, its only nuclear generating unit |
| Wolf Creek purchases uranium and has it processed for use as fuel in its reactor |
| This is a three step process that involves conversion of uranium concentrates to uranium hexafluoride, enrichment of uranium hexafluoride and fabrication of nuclear fuel assemblies |
| The owners of Wolf Creek have on hand or under contract 100prca of the uranium and conversion services needed to operate Wolf Creek through September 2009 |
| The owners also have under contract 100prca of the uranium enrichment required to operate Wolf Creek through March 2008 |
| Fabrication requirements are under contract through 2024 |
| Letters of intent have been issued with suppliers for a substantial portion of Wolf Creek’s uranium, conversion and enrichment requirements extending through at least 2017 |
| 9 All uranium, uranium conversion and uranium enrichment arrangements, as well as the fabrication agreement, have been entered into in the ordinary course of business |
| However, contraction and consolidation among suppliers of these commodities and services, coupled with increasing worldwide demand and past inventory drawdowns, have introduced some uncertainty as to Wolf Creekapstas ability to replace some of these contracts in the event of a protracted supply disruption |
| Great Plains Energy’s management believes this potential problem is common to the nuclear industry |
| Accordingly, in the event the affected contracts were required to be replaced, Great Plains Energy’s and Wolf Creekapstas management believes that the industry and government would work together to minimize disruption of the nuclear industryapstas operations, including Wolf Creekapstas operations |
| See Note 4 to the consolidated financial statements for additional information regarding nuclear plant |
| Natural Gas KCP&L is projecting decreased use of natural gas during 2006 as a result of KCP&L’s projected normal summer weather and fewer plant outages in 2006 |
| KCP&L has hedged approximately 45prca of its 2006 projected natural gas usage for generation requirements to serve retail load and firm MWh sales |
| Purchased Power At times, KCP&L purchases power to meet its customers’ needs |
| Management believes KCP&L will be able to obtain enough power to meet its future demands due to the coordination of planning and operations in the SPP region; however, price and availability of power purchases may be impacted during periods of high demand |
| KCP&L’s purchased power, as a percent of MWh requirements, averaged approximately 5prca for 2005, 2004 and 2003 |
| Environmental Matters KCP&L’s operations are subject to regulation by federal, state and local authorities with regard to air and other environmental matters |
| The generation and transmission of electricity produces and requires disposal of certain hazardous products that are subject to these laws and regulations |
| In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions |
| Failure to comply with these laws and regulations could have a material adverse effect on KCP&L KCP&L operates in an environmentally responsible manner and seeks to use current technology to avoid and treat contamination |
| KCP&L regularly conducts environmental audits designed to ensure compliance with governmental regulations and to detect contamination |
| Environmental-related legislation is continuously introduced in Congress |
| Such legislation typically includes various compliance dates and compliance limits |
| Such legislation could have the potential for a significant financial impact on KCP&L, including the installation of new pollution control equipment to achieve compliance |
| However, KCP&L would seek recovery of capital costs and expenses for such compliance through rates |
| KCP&L will continue to monitor proposed legislation |
| See Note 13 to the consolidated financial statements for additional information regarding environmental matters |
| STRATEGIC ENERGY Great Plains Energy owns just under 100prca of the indirect interest in Strategic Energy |
| Strategic Energy provides competitive retail electricity supply services by entering into power supply contracts to supply electricity to its end-use customers |
| Of the states that offer retail choice, Strategic Energy operates in California, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania and Texas |
| In addition to competitive retail electricity supply services, Strategic Energy records insignificant wholesale revenues and purchased power expense incidental to the retail services provided |
| Strategic Energy also provides strategic planning, consulting and billing and scheduling services in the natural gas and electricity markets |
| 10 Strategic Energy provides services to approximately 51cmam000 commercial, institutional and small manufacturing accounts for approximately 10cmam300 customers including numerous Fortune 500 companies, smaller companies and governmental entities |
| Strategic Energy’s projected MWh deliveries for 2006 based on signed contracts and expected additional MWh contracts and deliveries are in the range of 16 to 18 million MWhs |
| Based solely on expected usage under current signed contracts, Strategic Energy has forecasted future MWh commitments (backlog) of 10dtta4 million, 4dtta3 million and 2dtta3 million for the years 2006 through 2008, respectively |
| Strategic Energy’s revenues averaged approximately 55prca of Great Plains Energy’s revenues over the last three years |
| Strategic Energy’s net income accounted for approximately 17prca, 24prca and 21prca of Great Plains Energy’s income from continuing operations in 2005, 2004 and 2003, respectively |
| Strategic Energy’s growth objective is to continue to expand in retail choice states and continue to earn its share of a large and growing market opportunity |
| Strategic Energy’s continued success is dependent on a number of industry and operational factors including, but not limited to, the ability to contract for wholesale MWhs to meet its customers’ needs at prices that are competitive with the host utility territory rates and with current and/or future competitors, the ability to provide value-added customer services and the ability to attract and retain employees experienced in providing service in retail choice states |
| Power Supply Strategic Energy does not own any generation, transmission or distribution facilities |
| Strategic Energy purchases blocks of electricity from power suppliers based on forecasted peak demand for its retail customers |
| Management believes it will have adequate access to energy in the markets it serves |
| Regulation Strategic Energy, as a participant in the wholesale electricity and transmission markets, is subject to FERC jurisdiction |
| Additionally, Strategic Energy is subject to regulation by state regulatory agencies in states where Strategic Energy is licensed to sell power |
| Each state has a public utility commission and rules related to retail choice |
| Each state’s rules are distinct and may conflict |
| These rules do not restrict the amount Strategic Energy can charge for its services, but can have an impact on Strategic Energy’s ability to provide retail electricity services in any jurisdiction |
| Texas During 2005, the Public Utility Commission of Texas (Texas PUC) opened a project to review rules related to the Price-to-Beat (PTB) and Provider of Last Resort |
| Should the Texas PUC change the current PTB mechanism to one that is less reflective of market-based rates, the change could have an impact on this competitive market and Strategic Energy’s prospects for growth in Texas |
| Seams Elimination Charge Adjustment Seams Elimination Charge Adjustment (SECA) is a transitional pricing mechanism authorized by FERC and intended to compensate transmission owners for the revenue lost as a result of FERC’s elimination of regional through and out rates between PJM Interconnection (PJM) and the Midwest Independent Transmission System Operator, Inc |
| (MISO) during a 16-month transition period from December 1, 2004, through March 31, 2006 |
| See Note 5 to the consolidated financial statements for further information regarding SECA Transmission In many markets, RTOs/ISOs manage the power flows, maintain reliability and administer transmission access for the electric transmission grid in a defined region |
| RTOs/ISOs coordinate and monitor communications among the generator, distributor and retail electricity provider |
| Additionally, RTOs/ISOs manage the real-time electricity supply and demand, and direct the energy flow |
| Through these activities RTOs/ISOs maintain a reliable energy supply within their region |
| 11 As a competitive retail electricity supplier, Strategic Energy must register with each RTO/ISO in order to operate in the markets covered by their grids |
| Strategic Energy primarily engages with PJM, New England RTO (formerly ISO-New England), California ISO, New York ISO, Electric Reliability Council of Texas (ERCOT) and MISO In some cases, RTO/ISOs provide Strategic Energy with all or a combination of the data for billing, settlement, application of electricity rates and information regarding the imbalance of electricity supply |
| In addition, they provide balancing energy services and ancillary services to Strategic Energy in the fulfillment of providing services to retail end users |
| Strategic Energy must go through a settlement process with each RTO/ISO in which the RTO/ISO compares scheduled power with actual meter usage during a given time period and adjusts the original costs charged to Strategic Energy through a revised settlement |
| All participants in the RTOs/ISOs have exposure to other market participants |
| In the event of default by a market participant within the RTOs/ISOs, the uncollectible balance is generally allocated to the remaining participants in proportion to their load share |
| RTOs/ISOs may continue to modify the market structure and mechanisms in an attempt to improve market efficiency |
| In addition, existing regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to Strategic Energy’s activities |
| These actions could have an effect on Strategic Energy’s results of operations |
| Strategic Energy participates extensively, together with other market participants, in relevant RTO/ISO governance and regulatory issues |
| Competition Strategic Energy operates in several retail choice electricity markets |
| Strategic Energy has several competitors that operate in most or all of the same states in which it provides services to customers |
| Some of these competitors also operate in states other than where Strategic Energy has operations |
| Strategic Energy also faces competition in certain markets from regional suppliers and deregulated utility affiliates formed by holding companies affiliated with regulated utilities to provide retail load in their home market territories |
| Strategic Energy’s competitors vary in size from small companies to large corporations, some of which have significantly greater financial, marketing, and procurement resources than Strategic Energy |
| Additionally, Strategic Energy, as well as its other competitors, must compete with the host utility in order to convince customers to switch from the host utility |
| In most markets, there is a regulatory lag that slows the adjustment of host public utility rates in response to changes in wholesale prices, which may negatively affect Strategic Energy’s ability to compete in a rising wholesale price environment |
| The principal elements of competition are price, service and product differentiation |
| GREAT PLAINS ENERGY AND CONSOLIDATED KCP&L EMPLOYEES At December 31, 2005, Great Plains Energy had 2cmam382 employees |
| KCP&L has labor agreements with Local 1613, representing clerical employees (expires March 31, 2008), with Local 1464, representing transmission and distribution workers (expires January 31, 2009), and with Local 412, representing power plant workers (expires February 28, 2007) |
| All of the individuals in the following table have been officers or employees in a responsible position with the Company for the past five years except as noted in the footnotes |
| The term of office of each officer commences with his or her appointment by the Board of Directors and ends at such time as the Board of Directors may determine |
| There are no family relationships between any of the executive officers, nor any arrangement or understanding between any executive officer and any other person involved in officer selection |
| 12 Officers of Great Plains Energy Name Age Current Position(s) Year First Assumed An Officer Position Michael J Chesser ^(a)* 57 Chairman of the Board and Chief Executive Officer 2003 William H Downey ^(b)* 61 President and Chief Operating Officer 2000 Terry Bassham ^(c)* 45 Executive Vice President, Finance and Strategic Development and Chief Financial Officer 2005 Michael W Cline ^(d) 44 Treasurer and Chief Risk Officer 2003 Barbara B Curry ^(e)* 51 Senior Vice President, Corporate Services and Corporate Secretary 2005 Michael L Deggendorf ^(f) 44 Vice President, Public Affairs 2005 Stephen T Easley ^(g)* 50 Senior Vice President, Supply - KCP&L 2000 Mark G English ^(h)* 54 General Counsel and Assistant Secretary 2003 Chris B Giles ^(i)* 52 Vice President, Regulatory Affairs - KCP&L 2005 Todd A Kobayashi ^(j) 38 Vice President, Strategy and Investor Relations 2005 Shahid Malik ^(k)* 45 Executive Vice President President and Chief Executive Officer - Strategic Energy 2004 John R Marshall ^(l)* 56 Senior Vice President, Delivery - KCP&L 2005 William G Riggins ^(m)* 47 Vice President, Legal and Environmental Affairs and General Counsel - KCP&L 2000 Lori A Wright ^(n)* 43 Controller 2002 John J DeStefano^ (o)* 56 President - Great Plains Power Incorporated President - Home Service Solutions Inc |
| 1989 13 Officers of KCP&L Name Age Current Position(s) Year First Assumed An Officer Position Michael J Chesser ^(a)* 57 Chairman of the Board 2003 William H Downey ^(b)* 61 President and Chief Executive Officer 2000 Terry Bassham ^(c)* 45 Chief Financial Officer 2005 Lora C Cheatum ^(p)* 49 Vice President, Administrative Services 2005 Michael W Cline ^(d) 44 Treasurer 2003 F Dana Crawford ^(q)* 55 Vice President, Plant Operations 2005 Barbara B Curry ^(e)* 51 Secretary 2005 Stephen T Easley ^(g)* 50 Senior Vice President, Supply 2000 Mark G English ^(h) 54 Assistant Secretary 2003 Chris B Giles ^(i)* 52 Vice President, Regulatory Affairs 2005 William P Herdegen III ^(r)* 51 Vice President, Customer Operations 2001 John R Marshall ^(l)* 56 Senior Vice President, Delivery 2005 William G Riggins ^(m)* 47 Vice President, Legal and Environmental Affairs and General Counsel 2000 Marvin L Rollison ^(s) 53 Vice President, Corporate Culture and Community Strategy 2005 Richard A Spring ^* 51 Vice President, Transmission 1994 Lori A Wright ^(n)* 43 Controller 2002 * Designated an executive officer |
| Chesser was previously Chief Executive Officer of United Water (2002-2003) and President and Chief Executive Officer of GPU Energy (2000-2002) |
| Downey was previously Executive Vice President of Great Plains Energy (2001- 2003) and Executive Vice President of KCP&L (2000-2002) and President - KCP&L Delivery Division (2000-2002) |
| Bassham was previously Executive Vice President, Chief Financial and Administrative Officer (2001-2005) and Executive Vice President and General Counsel (2000-2001) of El Paso Electric Company |
| Cline was previously Treasurer of Great Plains Energy (2005), Assistant Treasurer of Great Plains Energy and KCP&L (2003-2005), Director, Corporate Finance (2001-2002), and Assistant Treasurer-Corporate Finance of Corning Inc |
| Curry was previously Senior Vice President, Retail Operations (2003-2004), Executive Vice President, Global Human Resources (2001-2003) and Executive Vice President, Corporate Services (1997-2001) of TXU Corporation |
| Deggendorf was previously Senior Director, Energy Solutions of KCP&L (2002-2005), Senior Vice President of Everest Connections, a cable services company (2000-2002) and Vice President of UtiliCorp Communications (2000-2002) |
| Easley was previously Vice President, Generation Services (2002-2005), President and CEO of GPP (2001-2002) and Vice President - Business Development of KCP&L Power Division (2000-2001) |
| Giles was previously Senior Director, Regulatory Affairs and Business Planning (2004-2005) and Director, Regulatory Affairs of KCP&L (1993-2004) |
| Kobayashi was previously Investor Relations Officer (2002-2005) and Director-Investor Relations and Corporate Development of Lante Corporation, a technology consulting firm (2000-2002) |
| Malik was appointed as President and Chief Executive Officer of Strategic Energy effective November 10, 2004 and was appointed Executive Vice President of Great Plains Energy effective January 1, 2006 |
| Malik was previously a partner of Sirius Solutions LLP, a consulting company, (2002-2004) and President of Reliant Energy Wholesale Marketing Group (1999-2002) |
| Marshall was previously President of Coastal Partners, Inc, a strategy consulting company (2001-2005), Senior Vice President, Customer Service of Tennessee Valley Authority (2002-2004), and President of Duquesne Light Company (1999-2001) |
| Riggins was previously General Counsel of Great Plains Energy (2000-2005) |
| Wright served as Assistant Controller of KCP&L from 2001 until named Controller in 2002 and was Director of Accounting and Reporting of American Electric Power Company, Inc |
| DeStefano retired December 31, 2005 |
| Cheatum was previously Interim Vice President, Human Resources (2004-2005) and Director, Human Resources (2001-2004) of KCP&L, and Regional Human Resources Director (1999-2001) of McLane Distribution, a division of Wal-Mart |
| Crawford was previously Plant Manager (1994-2005) of KCP&L’s LaCygne Generating Station |
| Herdegen was Chief Operating Officer of Laramore, Douglass and Popham, an engineering consulting company, (2001) and Vice President and Director of Utilities Practice of System Development Integration, a consulting company, (1999-2001) |
| Rollison was previously Supervisor-Engineering (2000-2005) |
| com and KCP&L’s website is www |
| Information contained on the companies’ websites is not incorporated herein |
| Both companies make available, free of charge, on or through their websites, their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after the companies electronically file such material with, or furnish it to, the SEC In addition, the companies make available on or through their websites all other reports, notifications and certifications filed electronically with the SEC ITEM 1A RISK FACTORS Actual results in future periods for Great Plains Energy and consolidated KCP&L could differ materially from historical results and the forward-looking statements contained in this report |
| Factors that might cause or contribute to such differences include, but are not limited to, those discussed below |
| The companies’ business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results, and are often beyond the companies’ control |
| Additional risks and uncertainties not presently known or that the companies’ management currently believes to be immaterial may also adversely affect the companies |
| The risk factors described below, as well as the other information included in this Annual Report and in the other documents filed with the SEC, should be carefully considered before making an investment in the Company’s securities |
| Risk factors of consolidated KCP&L are also risk factors for Great Plains Energy |
| The Company has Regulatory Risks The Company is subject to extensive federal and state regulation, as described below |
| Failure to obtain adequate rates or regulatory approvals, in a timely manner, adoption of new regulations by federal or state agencies, or changes to current regulations and interpretations of such regulations may materially affect the Company’s business and its results of operations and financial position |
| The Energy Policy Act of 2005 repealed the Public Utility Holding Company Act of 1935, as amended, and provided certain utility customer protection authority to FERC and the states |
| The Energy Policy Act of 2005, among other things, also requires FERC to perform a study of competition in wholesale and retail electricity markets and authorizes the creation of an Electric Reliability Organization (ERO) to establish 15 and enforce mandatory reliability standards subject to FERC oversight |
| The final rule for ERO development and processes for insuring reliable grid operations was issued in February 2006 |
| Management has not yet determined the impact of this final rule |
| FERC is in the process of establishing rules implementing the Energy Policy Act of 2005, and there is the risk that the rules may adversely affect operations, the results of operations and financial condition of the Company |
| KCP&L is regulated by the MPSC and KCC with respect to retail rates, certain accounting matters, standards of service and, in certain cases, the issuance of securities and certification of facilities and service territories |
| Failure to obtain adequate and timely rate relief may adversely affect KCP&L’s results of operations and financial condition |
| KCP&L is also subject to regulation by FERC with respect to the issuance of short-term debt, wholesale electricity sales and transmission matters and the NRC as to nuclear operations |
| Strategic Energy is a participant in the wholesale electricity and transmission markets, and is subject to FERC regulation with respect to wholesale electricity sales and transmission matters |
| Additionally, Strategic Energy is subject to regulation by state regulatory agencies in states where it has retail customers |
| Each state has a public utility commission and rules related to retail choice |
| Each stateapstas rules are distinct and may conflict |
| These rules do not restrict the amount Strategic Energy can charge for its services, but can have an impact on Strategic Energyapstas ability to provide retail electricity services in each state |
| Additionally, each state regulates the rates of the host public utility, and the timing and amount of changes in host public utility rates can materially affect Strategic Energy’s results of operations and financial position |
| The Company has Financial Market and Ratings Risks The Company relies on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital requirements not satisfied by cash flows from operations |
| KCP&L’s capital requirements are expected to increase substantially over the next several years as it implements the generation and environmental projects in its comprehensive energy plan |
| The Company’s management believes that it will maintain sufficient access to these financial markets at a reasonable cost based upon current credit ratings and market conditions |
| However, changes in market conditions or credit ratings could adversely affect its ability to access financial markets at a reasonable cost, impact the rate treatment provided KCP&L, or both, and therefore materially affect its results of operations and financial position |
| These ratings impact the Company’s cost of funds and Great Plains Energy’s ability to provide credit support for its subsidiaries |
| The Company’s Financial Statements Reflect the Application of Critical Accounting Policies The application of the Company’s critical accounting policies reflects complex judgments and estimates |
| These policies include industry-specific accounting applicable to regulated public utilities, accounting for pensions, long-lived and intangible assets, goodwill and derivative instruments |
| The adoption of new Generally Accepted Accounting Principles (GAAP) or changes to current accounting policies or interpretations of such policies may materially affect the Company’s results of operations and financial position |
| The Company is Subject to Environmental Laws and the Incurrence of Environmental Liabilities The Company is subject to regulation by federal, state and local authorities with regard to air and other environmental matters primarily through KCP&L’s operations |
| The generation, transmission and distribution of electricity produces and requires disposal of certain hazardous products, which are subject to these laws and regulations |
| In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including 16 fines, injunctive relief and other sanctions |
| KCP&L regularly conducts environmental audits designed to ensure compliance with governmental regulations and to detect contamination |
| Failure to comply with these laws and regulations could have a material adverse effect on Great Plains Energy and consolidated KCP&L results of operations and financial position |
| New environmental laws and regulations affecting KCP&L’s operations may be adopted, and new interpretations of existing laws and regulations could be adopted or become applicable to KCP&L or its facilities, which may substantially increase its environmental expenditures in the future |
| New facilities, or modifications of existing facilities, may require new environmental permits or amendments to existing permits |
| Delays in the environmental permitting process, denials of permit applications or conditions imposed in permits may materially affect the cost and timing of the generation and environmental retrofit projects included in the comprehensive energy plan, among other projects, and thus materially affect KCP&L’s results of operations and financial position |
| In addition, KCP&L may not be able to recover all of its costs for environmental expenditures through rates in the future |
| Under current law, KCP&L is also generally responsible for any on-site liabilities associated with the environmental condition of its facilities that it has previously owned or operated, regardless of whether the liabilities arose before, during or after the time it owned or operated the facilities |
| The incurrence of material environmental costs or liabilities, without related rate recovery, could have a material adverse effect on KCP&L’s results of operations and financial position |
| See Note 13 to the consolidated financial statements for additional information regarding environmental matters |
| Great Plains Energy’s Ability to Pay Dividends and Meet Financial Obligations Depends on its Subsidiaries Great Plains Energy is a holding company with no significant operations of its own |
| The primary source of funds for payment of dividends to its shareholders and its financial obligations is dividends paid to it by its subsidiaries, particularly KCP&L The ability of Great Plains Energy’s subsidiaries to pay dividends or make other distributions, and, accordingly, Great Plains Energy’s ability to pay dividends on its common stock and meet its financial obligations, will depend on the actual and projected earnings and cash flow, capital requirements and general financial position of its subsidiaries, as well as on regulatory factors, financial covenants, general business conditions and other matters |
| KCP&L and Strategic Energy are Affected by Demand, Seasonality and Weather The results of operations of KCP&L and Strategic Energy can be materially affected by changes in weather and customer demand |
| KCP&L and Strategic Energy estimate customer demand based on historical trends, to procure fuel and purchased power |
| Differences in customer usage from these estimates due to weather or other factors could materially affect KCP&L’s and Strategic Energy’s results of operations |
| Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities |
| KCP&L is significantly impacted by seasonality with approximately one-third of its retail revenues recorded in the third quarter |
| Strategic Energy is impacted by seasonality, but to a much lesser extent |
| In addition, severe weather, including but not limited to tornados, snow, rain and ice storms can be destructive causing outages and property damage that can potentially result in additional expenses and lower revenues |
| KCP&L’s Iatan and Hawthorn stations use water from the Missouri River for cooling purposes |
| Low water and flow levels, which have been experienced in recent years, can increase KCP&L’s maintenance costs at these stations and, if these levels get low enough, could cause KCP&L to modify plant operations |
| KCP&L and Strategic Energy have Commodity Price Risks KCP&L and Strategic Energy engage in the wholesale and retail marketing of electricity and, accordingly, are exposed to risks associated with the price of electricity |
| Strategic Energy routinely 17 enters into contracts to purchase and sell electricity in the normal course of business |
| KCP&L generates, purchases and sells electricity in the retail and wholesale markets |
| Fossil Fuel and Transportation Prices Impact KCP&L’s Costs Less than 1prca of KCP&Lapstas rates contain an automatic fuel adjustment clause, exposing KCP&L to risk from changes in the market prices of coal and natural gas used to generate power and in the cost of coal and natural gas transportation |
| Changes in KCP&L’s fuel mix due to electricity demand, plant availability, transportation issues, fuel prices and other factors can also adversely affect KCP&L’s fuel costs |
| KCP&L does not hedge its entire exposure from fossil fuel and transportation price volatility |
| As a consequence, its results of operations and financial position may be materially impacted by changes in these prices, until increased costs are recovered in rates |
| Wholesale Electricity Prices Affect Costs and Revenues KCP&Lapstas ability to maintain or increase its level of wholesale sales depends on the wholesale market price, transmission availability and the availability of KCP&L’s generation for wholesale sales, among other factors |
| A substantial portion of KCP&L’s wholesale sales are made in the spot market, and thus KCP&L has immediate exposure to wholesale price changes |
| Declines in wholesale market price or availability of generation or transmission constraints in the wholesale markets, could reduce KCP&Lapstas wholesale sales and adversely affect KCP&L’s results of operations and financial position |
| KCP&L is also exposed to risk because at times it purchases power to meet its customers’ needs |
| The cost of these purchases may be affected by the timing of customer demand and/or unavailability of KCP&L’s lower-priced generating units |
| Wholesale power prices can be volatile and generally increase in times of high regional demand and high natural gas prices |
| Strategic Energy operates in competitive retail electricity markets, competing against the host utilities and other retail suppliers |
| Wholesale electricity costs, which account for a significant portion of its operating expenses, can materially affect Strategic Energy’s ability to attract and retain retail electricity customers at profitable prices |
| There is also a regulatory lag that slows the adjustment of host public utility rates in response to changes in wholesale prices |
| This lag can negatively affect Strategic Energy’s ability to compete in a rising wholesale price environment |
| Strategic Energy manages wholesale electricity risk by establishing risk limits and entering into contracts to offset some of its positions to balance energy supply and demand; however, Strategic Energy does not hedge its entire exposure to electricity price volatility |
| As a consequence, its results of operations and financial position may be materially impacted by changes in the wholesale price of electricity |
| KCP&L has Operations Risks The operation of KCP&L’s electric generation, transmission and distribution systems involves many risks, including breakdown or failure of equipment or processes; operating limitations that may be imposed by equipment conditions, environmental or other regulatory requirements; fuel supply or fuel transportation reductions or interruptions; transmission scheduling; and catastrophic events such as fires, explosions, severe weather or other similar occurrences |
| These and other operating events may reduce KCP&L’s revenues or increase its costs, or both, and may materially affect KCP&L’s results of operations and financial position |
| KCP&L has Construction-Related Risks KCP&L’s comprehensive energy plan includes the construction of an estimated 850 MW coal-fired generating plant, 100dtta5 MW of wind generation and environmental retrofits at two existing coal-fired units |
| KCP&L has not recently managed a construction program of this magnitude |
| There are risks 18 that actual costs may exceed budget estimates, delays may occur in obtaining permits and materials, suppliers and contractors may not perform as required under their contracts, and events beyond KCP&L’s control may occur that may materially affect the schedule, budget and performance of these projects |
| These risks may increase the costs of these construction projects, require KCP&L to purchase additional electricity to supply its retail customers until the projects are completed, or both, and may materially affect KCP&L’s results of operations and financial position |
| KCP&L has Retirement-Related Risks Through 2010, approximately 30prca of KCP&L’s current employees will be eligible to retire with full pension benefits |
| Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to the new employees, may adversely affect KCP&L’s ability to manage and operate its business |
| Substantially all of KCP&L’s employees participate in defined benefit and postretirement plans |
| If KCP&L employees retire when they become eligible for retirement through 2010, or if KCP&L’s plans experience adverse market returns on its investments, or if interest rates materially fall, KCP&L’s pension expense and contributions to the plans could rise substantially over historical levels |
| The timing and number of employees retiring and selecting the lump sum payment option could result in pension settlement charges that could materially affect KCP&L’s results of operations |
| In addition, assumptions related to future costs, returns on investments, interest rates and other actuarial assumptions, including projected retirements, have a significant impact on KCP&L’s results of operations and financial position |
| Proposed legislation pending in Congress on pension reform could result in increased pension funding requirements |
| The Financial Accounting Standards Board (FASB) has a project to reconsider the accounting for pensions and other post-retirement benefits |
| This project may result in accelerated expense, liability recognition and contributions |
| KCP&L has Nuclear Exposure KCP&L owns 47prca (548 MW) of Wolf Creek |
| The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities, including Wolf Creek |
| In the event of non-compliance, the NRC has the authority to impose fines, shut down the facilities, or both, depending upon its assessment of the severity of the situation, until compliance is achieved |
| Any revised safety requirements promulgated by the NRC could result in substantial capital expenditures at Wolf Creek |
| Wolf Creek has the lowest fuel cost per MWh of any of KCP&Lapstas generating units |
| Although not expected, an extended outage of Wolf Creek, whether resulting from NRC action, an incident at the plant or otherwise, could have a substantial adverse effect on KCP&Lapstas results of operations and financial position in the event KCP&L incurs higher replacement power and other costs that are not recovered through rates |
| If a long-term outage occurred, the state regulatory commissions could reduce rates by excluding the Wolf Creek investment from rate base |
| Ownership and operation of a nuclear generating unit exposes KCP&L to risks regarding decommissioning costs at the end of the unitapstas life |
| KCP&L contributes annually to a tax-qualified trust fund to be used to decommission Wolf Creek |
| The funding level assumes a projected level of return on trust assets |
| If returns are lower than the expected level, management believes a rate increase would be allowed ensuring full recovery of decommissioning costs over the remaining life of the unit |
| KCP&L is also exposed to other risks associated with the ownership and operation of a nuclear generating unit, including but not limited to potential liability associated with the potential harmful effects on the environment and human health resulting from the operation of a nuclear generating unit and the 19 storage, handling and disposal of radioactive materials, and to potential retrospective assessments and losses in excess of insurance coverage |
| Strategic Energy Operates in Competitive Retail Electricity Markets Strategic Energy has several competitors that operate in most or all of the same states in which it serves customers |
| Some of these competitors also operate in states other than where Strategic Energy has operations |
| It also faces competition in certain markets from regional suppliers and deregulated utility affiliates formed by holding companies affiliated with regulated utilities to provide retail load in their home market territories |
| Strategic Energyapstas competitors vary in size from small companies to large corporations, some of which have significantly greater financial, marketing and procurement resources than Strategic Energy |
| Additionally, Strategic Energy, as well as its other competitors, must compete with the host utility in order to convince customers to switch from the host utility |
| Strategic Energy’s results of operations and financial position are impacted by the success Strategic Energy has in attracting and retaining customers in these markets |
| Strategic Energy has Wholesale Electricity Supplier Credit Risk Strategic Energy has credit risk exposure in the form of the loss that it could incur if a counterparty failed to perform under its contractual obligations |
| Strategic Energy enters into forward contracts with multiple suppliers |
| In the event of supplier non-delivery or default, Strategic Energy’s results of operations could be affected to the extent the cost of replacement power exceeded the combination of the contracted price with the supplier and the amount of collateral held by Strategic Energy to mitigate its credit risk with the supplier |
| Strategic Energy’s results of operations could also be affected, in a given period, if it were required to make a payment upon termination of a supplier contract to the extent the contracted price with the supplier exceeded the market value of the contract at the time of termination |